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Market rent – what tenants and landlords should “have regard to…”

A recent Court of Appeal case discussed whether the determination of market rent by an expert valuer could be indisputably binding on the parties.

The Court found that the valuation of market rent must be determined within the provisions of the sub-lease, and the valuer had an obligation to only “have regard to” comparable premises within the vicinity of the Premises.

Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCATCD 1

Background

Strike Australia operates as a 10-pin bowling alley, bar and entertainment venue. Strike Australia subleases from Data Base Corporate, and one of their premises is located at the King Street Wharf in Sydney.

The lease between Strike Australia and Data Base commenced in 2007, and Strike Australia had two options to renew the lease (each for a further term of five years).

In 2017, Strike Australia exercised its first option to renew the lease. When no agreement could be reached between the parties, it was decided that a rent review was to be conducted by an independent valuer.

The key provision in the lease stated that the valuer must have regard to market rents for “comparable premises in the vicinity of the Premises”.

In determining the market rent for the Premises, the valuer compared market rents in the King Street Wharf complex, rents for basements in the CBD and rents for properties in Macquarie Park and Bondi Beach.

It was held by the primary judge that the valuer failed to determine the market rent of the Premises in a way that was consistent with the provisions of the lease. In particular, the properties relied on by the valuer were not within the vicinity of the Premises, and as a result the market rent was not binding on the parties.

The Appeal

Strike Australia raised the following grounds of appeal:

  1. That the primary judge had erred in finding that the valuer did not carry out his determination of the market rent in accordance with the mandatory considerations outlined in the lease;
  2. If ground 1 was not made out, that the primary judge had nevertheless erred in finding that the valuer erroneously considered market rents for premises “not in the vicinity of the Premises”; and
  3. If grounds 1 and 2 were made good, that the primary judge erred in finding that the determination of market rent by the valuer was not binding on Strike Australia and Data Base Corporate.

Appeal Findings

Appeal dismissed with costs.

Ground 1 was dismissed on the basis that the valuer had an obligation under the lease only to have regard to equivalent premises in the vicinity of the Premises, not other comparable premises outside of the vicinity of the Premises.

Ground 2 was dismissed on the basis that the valuer did not have the freedom to determine the limits of “in the vicinity” in the lease. It was held that the primary judge was correct in determining that the other premises taken into account were outside the vicinity of the Premises.

Ground 3 was dismissed on the basis that grounds 1 and 2 were not made good and there was no logical merit in the final ground of appeal. In other words, due to the fact that grounds 1 and 2 could not be substantiated, it followed that ground 3 had no basis.

Conclusion

This case relied heavily on the interpretation of the phrase “have regard to”. It required the Court of Appeal to determine whether the factors listed in clause 4.5(c) of the lease were “mandatory but not exhaustive, or mandatory and exhaustive”. The primary judge understood the phrase “have regard to”, to mean that the valuer was only to have regard to a particular class of rents. To only include some rents that fell within clause 4.5 of the lease would be inconsistent with the requirements of the contract.

The majority of the Court of Appeal favoured this interpretation. Baston JA stated that “…a provision which identifies a specific category of properties to which regard is to be had, may be understood as an implied exclusion of properties which do not fall within that category”. In other words, Baston JA acknowledged that while the lease did not provide an exhaustive list of what the valuer was to “have regard to”, the specific category of properties that were identified placed an implied limit on the category of properties that were not identified.

In his dissenting judgment, Bell P reasoned that although the lease dictated certain matters to which regard was required to be had, this was not all-inclusive as to the matters to which regard was authorised to be had. Bell P did not conform to the majority view that the lease be interpreted with such limited scope.

The outcome of this case came down to a matter of interpretation. This case should serve as a reminder for tenants and landlords that a valuer is bound by the terms of the lease. Each party has a right to dispute a valuation should the valuation be inconsistent with the provisions of the lease.

Grace Brophy, Lawyer
Paul Carroll, Partner 

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